Nonprofit ETS Making Quick Surge Into K-12 Market

Less than
three years after the Educational Testing Service moved into the
precollegiate testing market, the SAT's publisher managed last year to
pull $100 million from that increasingly lucrative pond.

A year ago, the behemoth nonprofit hooked the K-12 world's biggest
catch: a three-year, $175 million contract to oversee the California
state testing program. Since then, the ETS has landed a $35 million job
to run testing in its home state of New Jersey; a one-year, $7.2
million deal to build Puerto Rico's assessment program; and the task of
creating Indiana's high school testing program.

In addition, the ETS is a finalist in awards for two other states'
testing contracts, according to John H. Oswald, the vice president for
the testing service's K-12 assessments division.

The success is an early sign, according to industry observers, that
the famed maker of entrance exams for higher education has successfully
used its expertise and business acumen to become a potentially dominant
force in the field of elementary and secondary testing as well. And the
top ETS executive is promising that the entry into the K-12 field is
just the first step toward broadening the nonprofit's scope to include
products such as teacher professional development, career counseling,
and teacher certification.

"I would be really happy if people didn't know what the 'T' meant in
'ETS,'" said Kurt Landgraf, the president and chief executive officer
of the testing service, based in Princeton, N.J. "I think of this as an
educational-solutions company."

Competitors and Critics

Competitors are taking note of the ETS' early success in the K-12
market. While other test publishers sometimes bid jointly with the ETS
on projects, they know that the ETS is starting to take away business
that could be theirs.

"They've had a significant, good beginning," said Maureen DiMarco, a
senior vice president at Houghton Mifflin Co., the Boston-based
publisher that produces the Iowa Tests of Basic Skills and is a
subcontractor to the ETS on the New Jersey contract. "There's no
question they're going to be a major player."

Critics, however, point to what they see as the built-in advantages
that the ETS' nonprofit status gives it. While the ETS can carry
revenue from one year to the next—its assets totaled $150
million, according to its fiscal 2002 report to the Internal Revenue
Service—its tax burden is lighter than that of its
competitors.

"That doesn't seem right," said W. James Popham, a testing expert
and a professor emeritus at the University of California, Los Angeles.
"ETS goes in with this tremendous advantage." The ETS does not pay
federal tax on income it generates from its testing contracts.

Others question whether the ETS' reputation for high quality in
higher education will transfer into its work in the precollegiate
world.

"The real result remains to be seen," said Robert A. Schaeffer, the
public education director for the National Center for Fair & Open
Testing, the Cambridge, Mass.-based testing watchdog. "Are they going
to end up being a low-quality, high-volume production line?"

New Kid in Town

A few major corporations have long dominated K-12 testing. In
addition to the Iowa Tests, Houghton-Mifflin publishes the
Woodcock-Johnson III and the Stanford-Binet Intelligence Scales. The
McGraw-Hill Cos. produces the California Achievement Test and the
Comprehensive Test of Basic Skills, and Harcourt Inc. publishes the
Stanford Achievement Test and the Metropolitan Achievement Tests.

While a few small companies occasionally win state testing
contracts, those big three test publishers have ruled the large-scale
testing business in precollegiate education for the past two
decades.

For the first 50 years of its history, the ETS, founded in 1947 when
the American Council of Education, the Carnegie Foundation for the
Advancement of Teaching, and the College Entrance Examination Board
merged their testing programs into one nonprofit, never made a serious
effort to join that competition. That changed almost as soon as Mr.
Landgraf took over in 2000. He targeted K-12 as a place where the ETS
could add to its already-prodigious revenue sources, which include the
SAT college- entrance exam, the Graduate Record Examinations, and the
Advanced Placement program.

Almost immediately, Mr. Landgraf—who started his career in the
ETS marketing department before climbing to the No. 2 executive
position at E.I. duPont de Nemours & Co.—formed a for-profit
subsidiary, called K-12 Works, to bid on state testing contracts.

By the end of 2001, with the passage of the "No Child Left Behind"
Act, dramatic new growth was on the horizon for K-12 testing. The law
will require every state to assess student skills in reading and math
from 3rd grade through 8th grades and at least once in high school.
States must have their testing systems in place by the 2005-06 school
year.

To comply with the law, states will need to spend anywhere from $1.9
billion to $5.3 billion in state spending over the next six years, the
U.S. General Accounting Office estimated this month.

Already, the ETS is earning a share of that business. In 2002, the
California and other K-12 contracts contributed $100 million to its
$620 million in revenue.

The ETS subsumed K-12 Works under the nonprofit umbrella last
year.

The change was mostly for marketing purposes, Mr. Landgraf said in
an interview. On most contracts, the main office and K-12 division work
together, often with the home office taking the lead.

"It was very, very confusing for our potential partners," Mr.
Landgraf said. "The real brand equity for us is the Educational Testing
Service. The contracts that we had been winning, the ETS was the prime
contractor. It didn't make sense to have them separate."

Now that the K-12 division is a section of the ETSrather than a
separate business—the company can submit a "singular, unified
bid," Mr. Landgraf said.

The approach may be helpful in winning contracts. But ETS officials
say the restructuring will be of little use if they don't produce
high-quality products on their current projects, according to Mr.
Oswald, who joined the ETS last summer shortly after the
reorganization.

The first state contracts were "won based on the ETS brand name," he
added. "The next ones will be won on referrals."

California Dreamin'

That reputation may be built in large part in California.

Under the contract, the ETS has created an exam that measures
students' progress toward learning the content of the state's
standards, and it is writing a series of high school exit exams. It has
also hired CTB-McGraw Hill to administer tests that measure how well
the state's student perform against the national average. The testing
service also offered to consult extensively with state and local
policymakers about the state's testing program. Among its tasks will be
to help educators figure out all the tests they offer
students—from the state-run exams to AP exams—and how they
can simplify and improve the system.

"How they do in California will be very crucial to how they're
perceived in the quality of their products and in offering something
different in terms of test analysis," said Michael W. Kirst, a
co-director of the research group Policy Analysis for California
Education and an education professor at Stanford University.

But the ETS has many advantages in its competition for state
contracts.

The ETS offers generous salaries and benefits. Mr. Landgraf's salary
in fiscal 2002 was $416,000, and he received another $126,000 in
retirement and housing benefits. Most of the vice presidents make
$200,000 or more a year, according to the nonprofit's IRS tax
document.

What's more, the ETS has all of the trappings of academe. Its
headquarters, outside Princeton, is a pastoral campus. Its top
researchers are often published in leading assessment journals. And its
employees often win tenured positions at the nation's best
universities.

All of that is important in a field that recruits its talent from
the limited number of newly minted Ph.D.s, Mr. Kirst said.

While the California deal and other state contracts will help the
ETS establish a foothold in precollegiate assessment, Mr. Landgraf
wants the testing service to expand its reach into other portions of
the K-12 world.

In California, for example, Mr. Landgraf said, the ETS' West Coast
office is marketing Pathwise, a professional-development program that
offers teachers a variety of strategies to improve their teaching. The
testing service already has a wide range of products that it believes
might be helpful to K-12 schools. For instance, it is marketing its
Assessment Wizard, a computer program that helps teachers design
classroom tests.

Such efforts are only a start, Mr. Landgraf said. For him, being a
contractor that provides tests to states is not enough. The testing
service's K-12 products are already the biggest growth area for the
nonprofit, he said, and many more ideas in research and
development.

"We must have wrap-around products," he said.

Soon, he added, the ETS will be providing "anything to do with the
improvement of teaching and learning."

Vol. 22, Issue 38, Page 8

Published in Print: May 28, 2003, as Nonprofit ETS Making Quick Surge Into K-12 Market

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